Land Home Financial Services, Inc. Wholesale Division (LHFS)

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1 SECTION: 1 PAGE: 1 of 22 Program Codes: Margin and Caps: 5/1 LIBOR ARM: WJ51L-082 5/1 LIBOR ARM: 2.250% 2/2/5 5/1 LIBOR ARM INTEREST ONLY: WJ51LIO-082 5/1 LIBOR ARM INTEREST ONLY: 2.250% 2/2/5 Index: WSJ 1 Year LIBOR 1.01 Eligibility Matrix PRIMARY RESIDENCE 5/1 ARM, 5/1 I/O ARM PURCHASE AND RATE/TERM REFINANCE Units LTV / CLTV / HCLTV Loan Amount Min Credit Score Min Credit Score 5/1 5/1 I/O 89.9% - No MI (No I/O) $1,500, N/A 80% $2,000, % $1,500, Unit 80% $1,000, % $1,500, % $1,750, % $2,500, % $3,000, Unit 75% $1,500, % $1,250, PRIMARY RESIDENCE CASH-OUT REFINANCE Units LTV / CLTV / HCLTV Loan Amount Maximum Min Credit Score Min Credit Score Cash-Out 5/1 5/1 I/O 70% $1,000,000 $250, Unit 65% $1,250,000 $350, % $1,500,000 $350, % $1,500,000 $500, Unit 65% $1,500,000 $250, SECOND HOME 5/1 ARM, 5/1 I/O ARM PURCHASE AND RATE/TERM REFINANCE Units LTV / CLTV / HCLTV Loan Amount Min Credit Score Min Credit Score 5/1 5/1 I/O 80% $1,000, % $1,500, Unit 70% $1,750, % $2,250, % $1,250, % $1,500, SECOND HOME CASH-OUT Maximum Min Credit Score Min Credit Score Units LTV / CLTV / HCLTV Loan Amount Cash-Out 5/1 5/1 I/O 1 Unit 65% $1,000,000 $250,

2 SECTION: 1 PAGE: 2 of 22 INVESTMENT PROPERTY 5/1 ARM, 5/1 I/O ARM PURCHASE AND RATE/TERM REFINANCE Min Credit Score Min Credit Score Units LTV / CLTV / HCLTV Loan Amount 5/1 5/1 I/O 1 Unit 70% $1,000, INVESTMENT CASH-OUT Maximum Min Credit Score Min Credit Score Units LTV / CLTV / HCLTV Loan Amount Cash-Out 5/1 5/1 I/O 1 Unit 60% $1,000,000 $250, Foot Notes: 1. Minimum loan amount is $250,000 for Interest Only products. 2. Minimum loan amount for fully amortizing loans is the maximum Fannie Mae general loan limit (not high cost - area limit) + $1. Click here to access the Fannie Mae link for general loan limits. 3. Maximum DTI for all loans is 42.00%. 4. Depending on loan amount and LTV/CLTV, either a second appraisal or a CDA review may be required. 5. Rural property refinance with cash-out refinance and all declining markets require 5% reduction in max LTV/CLTV/HCLTV. 6. Reserve requirements: See Reserve Requirement Calculation Table. 7. Property owned < 6 months not eligible for cash-out, except as allowed per Fannie Mae Delayed Financing Exception guidelines. 8. Property owned 12 months or less: LTV/CLTV/HCLTV is based on the lesser of the appraised value or acquisition cost, regardless of any property improvements that have been made since purchase. 9. LTV, CLTV or HCLTV > 80%: a. No mortgage insurance required b. No subordinate financing allowed c. No Interest only 1.02 Summary Jumbo Elite Loan Program All loans in this category are underwritten to the secondary market using manual underwriting guidelines provided primarily by Fannie Mae. All loans must be underwritten in compliance with the Ability to Repay standards set forth in Appendix Q. For additional topics not specifically or fully addressed by Appendix Q guidance or herein, Fannie Mae underwriting guidelines should be followed Eligible Borrower(s) All borrowers must have a valid Social Security Number U.S. citizens Permanent resident aliens with proof of lawful permanent residence plus LHFS will require at least two years past U.S. employment history, U.S. residency and U.S. credit history Inter Vivos Revocable Trusts, Living Trust, Revocable Living Trust (revocable at any time by the Trustor) First time homebuyers defined as anyone who has not owned a home for three (3) years. For loans with more than one borrower where at least one borrower has owned a home in the past three (3) years, firsttime homebuyer requirements do not apply. Additional requirements apply, please reference First Time Homebuyer section Maximum four (4) borrowers per loan. Non-Occupant Co-Borrowers must be family members only (as defined in Fannie Mae Selling Guide B3-4.3), and occupant borrower(s) must by themselves qualify at 42.00% DTI maximum, and make the minimum contribution from their own funds required for the program.

3 SECTION: 1 PAGE: 3 of Ineligible Borrower(s) Foreign Nationals Non-Resident Aliens Non Permanent Resident Aliens Non-Occupant Co-borrowers Irrevocable trusts Land trusts Illinois Land Trusts Limited partnerships, general partners, corporations, and limit liability companies Borrowers party to any transaction where there is a relationship or business affiliation between the buyer, seller, loan agent, or originator that result in a non arm s length transaction. Such transactions include, but are not limited to: a. Applicants related by blood or marriage to the seller of the property; b. Owners, employees or family members of originating broker; c. Builder/developers of the property; d. Renters buying from landlord; e. Persons trading properties with the prior owner of the property. Borrowers with only an individual taxpayer identification number (ITIN) 1.05 Occupancy Eligible property types include Primary residences for 1 2 unit properties Second home residences for 1 unit properties, with the following requirements a. Located a reasonable distance away from the borrower s principal residence; b. Occupied by the borrower for some portion of the year; c. Suitable for year round use Investment residences for 1 unit properties Ineligible property types for occupancy include Primary residences for 3 4 unit properties Second home residences for 2 4 unit properties Investment residences for 2-4 unit properties 1.06 Property Types Eligible Property Types 1-2 Unit owner occupied properties 1 Unit second homes or investment properties Low/Mid/High Rise Condominiums and detached (site) condos, Fannie Mae Warrantable: o Condo Project Manager (CPM) or PERS or unexpired FNMA 1028 only. o Lender Full Review with CPM o Lender Limited Review only eligible for detached units and established 2-4 unit projects. Planned Unit Developments (PUDs) o Attached PUD: Lender Full Review meeting Fannie Mae Guidelines. o Detached PUD: No review required (treat as SFR) Modular homes Properties with 10 acres Leaseholds

4 SECTION: 1 PAGE: 4 of 22 Ineligible Property Types 3-4 unit properties Assisted living or board and care facilities Commercial Enterprises (e.g. Bed and Breakfast, Boarding House, Hotel) Condotels Co-ops Condos that do not meet Fannie Mae eligibility criteria Dome homes and other exotic or non-traditional types of structures Assisted Living Facilities Houseboats Leaseholds Live/Work Condos Log homes Manufactured homes and mobile homes Mixed Use Properties Properties held in a business name Properties with acreage greater than 10 acres (truncating acreage for appraisal purposes is not allowed) Properties located in Hawaii Lava Zones 1 & 2 Properties located on Indian (Native American) tribal or Trust land, or Indian Leased Land Properties subject to mineral rights, oil and/or gas leases** Properties with encroachments Properties with less than 650 square feet of habitable living space Properties with values significantly in excess of the predominant value of the subject s market area may be ineligible. Timeshares Unimproved Land and property currently in litigation Unique Properties (e.g. log homes, geodesic domes) Working Farms or Ranches Zoning violations including residential properties zoned commercial **Properties Subject to Oil, Gas, Water or Mineral Rights Properties where the title report reflects exceptions for outstanding oil, gas, water or mineral rights are acceptable if commonly granted by private institutional mortgage investors in the area where the Mortgaged Property is located, and: The exercise of such rights will not result in damage to the Mortgaged Property or impairment of the use or marketability of the Mortgaged Property for residential purposes and there is no right of surface or subsurface entry within 200 feet of the residential structure, or There are comprehensive endorsements to the title insurance policy that affirmatively insures the lender against damage or loss due to the exercise of such rights, such as but not limited to: o Environmental Protection Lien Endorsement, and o Restrictions, Encroachments, Minerals Endorsement without any deletions, and o Minerals and Surface Damage Endorsement Properties with existing wells (producing or non-producing) or active drilling to exercise any oil, gas or mineral rights may be considered on a case by case basis

5 SECTION: 1 PAGE: 5 of Ineligible Loan Transactions Non-Arm s length/at-interest transactions are ineligible under this program. Examples of Non-Arm s Length Transactions include, but are not limited to: Family sales or transfers Loans to owners and employees of TPOs. Any transaction where subordinate financing that is being paid off has identity of interest to the broker of record or any employees of the broker. A purchase transaction where the Seller wants to rent/lease back the subject property. Relationship between borrower and seller exists. In purchase transactions where the seller is a corporation, partnership or any other business entity, proof may be required that the borrower is not an owner of the business entity selling the property. Employer to employee sales or transfers Renters buying from a landlord Purchasing a property from a builder/developer who, in turn, is purchasing the borrower s existing property Borrower is related in some manner to a party to the transaction (loan broker, real estate brokers, appraiser, etc.) Subject Property where Current Loan Was Restructured or Modified are ineligible. A restructured loan is a mortgage loan in which the terms of the original transaction have changed resulting in the forgiveness of the mortgage or a restructure of the mortgage either through a modification or the origination of a new loan that results in any of the following: o forgiveness of a portion of the principal and/or interest on either the first or second lien. o application of a principal curtailment by or on behalf of the investor to simulate forgiveness. o conversion of any portion of the original mortgage debt to a soft subordinate mortgage o conversion of any portion of the original mortgage debt from secured to unsecured. Second home properties that are non-arm s length transactions are ineligible. Any loan with title held in trust cannot be executed with a Power of Attorney Exceptions may be considered for the following Non-Arm s Length Transactions on a case by case basis: Family sales or transfers Renter buying from landlord, with at least 24 months cancelled checks evidencing satisfactory pay history. Sellers or Buyers representing themselves as agent in the real estate transaction Geographic Lending Area/State Restrictions LHFS is currently approved to lend in 49 states & District of Columbia, excluding: Missouri, Please click here for current licensing information. State Restrictions for the Elite Jumbo Program: -Texas 50(a)(6) loans are not allowed. -Hawaii: Properties in Lava Flow Zones 1 or 2 are not allowed. -New York, Nebraska, Maine, Georgia, Mississippi, South Dakota, Wisconsin, Puerto Rico, US Territories, including Guam and Virgin Islands are ineligible.

6 SECTION: 1 PAGE: 6 of Escrow Account Waivers Escrows may be established for funds collected by the originator or servicer that are required to be paid under the Security Instrument. These funds include, but not limited to, taxes, insurance (hazard, flood, and mortgage) premiums, special assessments, ground rents, water, sewer, or other government impositions. Loans without escrows are subject to a loan level price adjustment. At a minimum, taxes and hazard insurance must be escrowed in order to avoid the loanlevel price adjustment. State related Escrow Waivers: California: Escrows may be waived at borrower request without conditions; District of Columbia: Escrows may be waived at borrower request without conditions; All Other States: May be waived at borrower request, subject to o A review of title work for evidence of tax liens or other evidence of failure to pay tax obligations; o File cannot reflect evidence of lapsed hazard insurance coverage; o To the extent the borrower has previously obtained mortgage loans without escrow requirements, the loan documentation should support a history of timely independent payment of escrow items. Borrowers with a prior history of Delinquent taxes or lapses in homeowner s coverage are not eligible to waive escrows Minimum Credit Scores/Credit Requirements A full residential mortgage credit report (RMCR) or Tri Merged in file conforming to Fannie Mae or Freddie Mac requirements must be used. Each borrower, including those with no income used to qualify, must have a valid social security number and generate a traditional credit score from at least two (2) of these repositories: Experian, Equifax, and TransUnion. Qualifying score for the loan is the lowest qualifying score of any borrower. Every submitted credit bureau report must include the full name, address and social security number of each borrower. If any of this information is inconsistent with that on any document in the file, a new report will be required. Age of Credit Report Credit reports may not be more than 90 days old at time of closing of the mortgage loan. Seller must verify that each account on the credit report with a balance has been checked within 90 days of the date of the credit report. Representative FICO Score An individual borrower s representative FICO score is determined by the following: If 2 credit bureau scores are reported, the representative score is the lower score; If 3 credit bureau scores are reported, the representative score is the middle score. For loan transactions with multiple borrowers, the lowest of all borrowers representative scores is used. Housing Payment History Housing Payment History: The occupant borrower(s) must have a complete, most recent, 24 months rental and/or mortgage payment history documented in the loan file (at least 12 months minimum rental history required for occupant borrowers who are First Time Homebuyers. No 30 day late payments in the past 24 months on any rent payment or on any mortgage on ANY real estate owned by any borrower on the transaction. Mortgages must either be on the credit report or have the most recent 24 month s payment history (or as long as the property owned, if owned less than 24 months) documented to meet program requirements: - Documented by cancelled checks or evidence of electronic transfers if a private party loan (VOM alone is not sufficient), or - Documented by cancelled checks, evidence of electronic transfers, or through an official statement produced by the lender, if a loan from an institutional lender.

7 SECTION: 1 PAGE: 7 of 22 Rental history for 24 months or the portion of the last 24 months in which the borrower was renting (12 months minimum for FTHB) must be evidenced by: - For the most recent 12 months, either: (a) an Institutional VOR, or (b) cancelled checks or evidence of electronic transfers - For months 13-24, either: (a) an institutional VOR, or (b) cancelled checks or evidence of electronic transfers, or (c) private party VOR, which is only acceptable if not from a family member or interested party to the subject transaction Minimum Credit Standards Depth of credit history: For each borrower whose income is used to qualify - Minimum of 3 open trade lines that show a 24 month history for each trade line is required, 2 of which must be reporting activity within the past 6 months, OR - Minimum of 8 satisfactory trade lines must be reported in total, of which 1 is for a mortgage, with a minimum of 1 open trade line reporting over the past 12 months or more. Borrower must have at a minimum 7 years of established credit history. The following are not acceptable to be counted as trade lines: non-traditional credit, loans in deferment period, accounts discharged through bankruptcy, authorized user accounts, judgments, charge-offs, collection accounts, foreclosures, deed-in-lieu of foreclosure, short sales or pre-foreclosure sales. Written explanation for all inquiries within 90 days is required. Adverse Credit History Required time elapsed since serious derogatory credit events from event date as defined below to the disbursement date of the new loan: Foreclosure 7 years measured from completion date of the F/C action Short sale, deed-in-lieu, or pre-foreclosure sale 4 years Bankruptcy: - Chapter 7 or 11 4 years from discharge or dismissal - Chapter 13 3 years from discharge or 4 years from dismissal All delinquent credit obligations that have the potential to affect the subject Mortgage Loan s lien position or diminish borrower s equity in the subject property must be paid off at or before closing, including without limitation all delinquent taxes, tax liens, judgments, and mechanics or materialmen s liens. In addition, all non-lien charge-off and collection accounts exceeding $1,000 in the aggregate must be paid off Loan Purpose Eligible Transaction Types Purchase Transactions Refinance Transactions Generally o All refinance transactions require the completion of a net tangible benefit analysis worksheet. Such worksheet must be completed, signed by the Mortgagor and included in the Loan File together with supporting documentation. Both the net tangible benefit analysis and all related worksheets and disclosures must be conducted, prepared and delivered in accordance with all Applicable Requirements. o Unless stated otherwise in the following sections, all refinance transactions must meet Continuity of Obligation requirements as described in the Fannie Mae Single Family Selling Guide. o Refinances on properties located in Texas subject to Article XVI, Section 50(a)(6), of the Texas Constitution are ineligible.

8 SECTION: 1 PAGE: 8 of 22 Rate/Term Refinances o The new loan amount is limited to The payoff of the present first lien mortgage; The payoff of any seasoned non first lien mortgages: A seasoned non first lien mortgage is a purchase money mortgage or a mortgage that has been in place for a minimum of 12 months. A seasoned equity line is defined as not having any draws greater than $2,000 in the past 12 months. Withdrawal activity must be documented with a transaction history for the Line of Credit. (Note: If a second lien being paid down or off is seasoned >12 months and has had no draws within 12 months >$2,000, then the new loan can be considered rate and term, whether or not the second being paid off was used for purchase money.) Closing costs and prepaid items. o Maximum cash to borrower allowed for a Rate and Term refinance transaction is $2,000. o The property cannot be listed for sale on date of loan application. o Inherited properties are eligible. Cash Out Refinance: o Continuity of Obligation: Borrower(s) must meet Fannie Mae Continuity of Obligations requirements, Fannie Mae Selling Guide B o Proceeds may be disbursed directly to the Mortgagor or any other payee and may be used to pay related closing costs, financing costs, and prepaid items. o Cash out refinances on properties located in Texas are ineligible. o Properties that have been listed for sale within 12 months of the loan application are not eligible. o Property must have been owned by Borrower(s) for at least six (6) months prior to the application date. o Inherited properties may not be refinanced prior to 12 months ownership. o Payoff of Unseasoned Liens: Payoff of liens seasoned less than 12 months at time of Loan application, or HELOCs with a draw in excess of $2,000 in the 12 months preceding the Loan application date are considered cash-out, unless the lien being paid off was used to acquire subject property. Seller must provide documentation covering relevant time period. (Seasoning may be measured from the HUD 1 closing date when loan was acquired, mortgage rating or other acceptable documentation in the loan file). o Seasoning and Eligibility for Cash Out: Cash-out refinance not allowed unless there is six (6) months seasoning of all existing liens on subject property and 6 months of subject property ownership by borrower(s), except as allowed per Fannie Mae Selling Guide B , Delayed Financing Exception guidelines,. o Rural Property LTV Restrictions: For cash-out refinance transactions, the maximum LTV/CLTV/HCLTV for rural properties (as indicated on the appraisal) is reduced by 5%. Delayed Purchase Refinance: o Defined as the refinance of a property purchased by the borrower for cash within 6 months of loan application; o Underwritten as a rate & term refinance; o Available for primary residence only; o The HUD 1 from original purchase must be included in the loan file. Documentation must show the down payment and closing costs were from the borrower s own funds (borrowed, gift or shared funds are not allowed).

9 SECTION: 1 PAGE: 9 of First Time Homebuyers (FTHB) Maximum loan amount is $1,250,000. Occupancy must be Primary Residence only. One unit properties only. See Reserve Requirements Calculation Table Section 3.01 for Reserve Requirements A First Time Homebuyer transaction is where no occupant borrower: (1) Has had an ownership interest in a residential property in the U.S. during the past three years, or (2) Has a mortgage history on their credit report spanning at least 24 months First time homebuyers must have an acceptable rental payment history see Housing Payment History section Payment shock: Cannot exceed 250% over the borrower s current rental payment. Example: Current rental payment = $1,000 per month Current rent X 2.5 (250%) = $2,500 maximum increase (shock) Maximum increase ($2,500) + $1,000 current rental payment = $3,500 maximum new payment 1.13 Calculation of LTV/CLTV/HCLTV Purchases Loan to value ratios are calculated based on the lesser of the purchase price or the appraised value of the subject property. Refinances, Rate & Term and Cash Out If the borrower has less than 12 months ownership in the property, LTV/CLTV/HCLTV ratios are calculated from the lesser of the purchase price or appraised value. Properties where capital improvements have been made after purchase, the LTV/CLTV/HCLTV can be based on the lesser of the current appraised value or the purchase price plus documented improvements (loan file must contain receipts to document hard costs). If the borrower has owned the property for more than 12 months the LTV/CLTV/HCLTV is based on the appraised value. Delayed Purchase Refinance Loan to value ratios are calculated based on the lesser of the purchase price and the appraised value of the subject property 1.14 Ownership Interest Title must be in the borrower s name(s) at the time of application for refinance transactions, and at the time of closing for all transactions. Borrower(s) may hold title as follows: Fee Simple with Title Vesting as: o Individual o Joint Tenants o Tenants in Common Leasehold Estates: In areas where leasehold estates are commonly accepted, loans secured by leasehold estates are eligible for purchase. The mortgage must be secured by the property improvements and the borrower s leasehold interest in the land. The leasehold estate and the improvements must constitute real property, must be subject to the mortgage lien, and must be insured by the lender s title policy.

10 SECTION: 1 PAGE: 10 of Secondary Financing No subordinate financing is allowed on transactions where LTV or CLTV or HCLTV >80%. CLTV/HCLTV thresholds shown in the matrix above may not be exceeded. Secondary liens must have terms and characteristics that are Fannie Mae eligible. They also must not permit negative amortization or contain a balloon feature or a prepayment restriction/penalty. For HELOCs, the entire credit line limit based on the Note must be used to calculate the HCLTV and determine program eligibility. If a credit line is reduced without a permanent modification of the original Note, then the entire original line limit must be used to calculate the HCLTV. Follow Fannie Mae for calculating CLTV, HCLTV and qualifying payment. For re-subordinating second liens, a certified copy of the executed subordination agreement and a copy of the Note must be delivered with the Mortgage Loan file. For new subordinate liens, a copy of the Note and a certified copy of the security instrument indicating that it is recording subordinate to the new first lien are required. HELOC Payment Calculation: To calculate the qualifying payment of a subordinate HELOC, follow Fannie Mae Selling Guide Section B.3.6. (If the HELOC does not require a payment, there is no recurring monthly debt obligation so the lender does not need to develop an equivalent payment amount) Continuity of Obligation To be eligible for a new loan transaction, a continuity of obligation is required. A continuity of obligation exists when: At least one borrower on the existing mortgage is a borrower obligated on the new mortgage. The borrower on title has been on title (but is not on the existing mortgage) and has been occupying the subject property for at least 12 months and has paid the mortgage for the previous 12 months (cancelled checks, front and back, are required) or can demonstrate a relationship (spouse, relative or domestic partner) with the current obligor. The borrower recently inherited or was legally awarded the property (divorce/separation settlement). If the borrower is on title (minimum 6 months) but there is no continuity of obligation, as detailed above, the loan will be treated as a cash-out refinance. The following applies: If the property is owned free & clear and was purchased within 6-12 months prior to the application date, the LTV is based on the lower of the sales price/acquisition price, documented by the HUD-1, or the current appraised value. If the property is owned free & clear and was purchased more than 12 months from the date of application, the LTV is based on the current appraised value. If the property has an existing lien and the borrower has been on title for a minimum of 6 months the maximum LTV is 50%, based on the current appraised value Treatment of Common Obligations Recurring obligations include: All installment loans; Revolving charge accounts; Real estate loans; Alimony; Child support; and Other continuing obligations

11 SECTION: 1 PAGE: 11 of 22 When computing the debt to income ratios for recurring obligations the ratio must include monthly housing expenses and additional recurring charges extending ten months or more such as: Payments on installment accounts; Child support or separate maintenance payments; Revolving accounts; and Alimony. Debts lasting less than ten months must be included if the amount of the debt affects the Borrower s ability to pay the mortgage during the months immediately after loan closing. Note: Monthly payments on revolving or open ended accounts, regardless of the balance, are counted as a liability for qualifying purposes even if the account appears likely to be paid off within 10 months or less. If the credit report shows any revolving accounts with an outstanding balance but no specific minimum monthly payment, the payment must be calculated as the greater of 5 percent of the balance, or $10. Note: If the actual monthly payment is documented or a copy of the current statement reflecting the monthly payment is obtained and retained in the file, that amount may be used for qualifying purposes. Payoff or Pay down of Debt for Qualification: Not allowed. Installment loans: Debts lasting less than ten months must be included if the amount of the debt affects the Borrower s ability to pay the mortgage during the months immediately after loan closing. Lease: Cannot be paid off or paid down to qualify regardless of number of remaining payments/months. Revolving Account Closed: If a revolving account is to be paid off and closed, a monthly payment on the current outstanding balance needs to be included in the borrower's debt-to-income ratio. Revolving Account Open: If a revolving debt is to be paid off but not closed, a monthly payment on the current outstanding balance will be considered as long-term debt. Open 30-day Charge Accounts: Monthly payments on open ended accounts, regardless of the balance, are counted as a liability for qualifying purposes even if the account appears likely to be paid off within 10 months or less. Alimony: Since there are tax consequences of alimony payments, the underwriter may choose to treat the monthly alimony obligation as a reduction from the Borrower s gross income when calculating qualifying ratios, rather than treating it as a monthly obligation. Deferred Payment Obligations: Debt payments, such as a student loan or balloon payment note scheduled to begin or come due within 12 months of the mortgage loan closing, must be included as anticipated monthly obligations during the underwriting analysis. Debt payments do not have to be classified as projected obligations if the Borrower provides written evidence that the debt will be deferred to a period outside the 12 month timeframe. Balloon payment notes that come due within one year of loan closing must be considered in the underwriting analysis.

12 SECTION: 1 PAGE: 12 of 22 Obligations not considered debt, and therefore not subtracted from gross income, include: Federal, State, and local taxes; Federal Insurance Contributions Act (FICA) or other retirement contributions, such as 401(k) accounts (including repayment of debt secured by these funds); Commuting costs; Union dues; Open accounts with zero balances; Automatic deductions to savings accounts; Child care; and Voluntary deductions. Contingent Liabilities - Co-Signed Loans: When a borrower co-signs for a loan to enable another party (the primary obligor) to obtain credit but is not the party who is actually repaying the debt the borrower has a contingent liability. A contingent liability exists when an individual is held responsible for payment of a debt if another party, jointly or severally obligated, defaults on the payment. The liability does not need to be considered as part of the borrower s recurring monthly debt obligations if the borrower can verify a history of documented payments on the co-signed debt by the primary obligor and ascertain that there is not a history of delinquent payments for that debt (since this could be an indication that the co-signer might have to assume the obligation at some point in the future). The primary obligor should have been making payments on the debt for at least 12 months The liability does need to be considered as part of the borrower s recurring monthly debt obligations if: o The person paying the debt is not obligated on the note (obtain copy of note to document) o The payment by the primary obligor cannot be sufficiently documented, o A sufficient payment history has not been established for the debt, o The payment has adjusted upward and a sufficient history is not established for the new payment amount, or o The primary obligor has a history of being delinquent in making payments on the debt. o Contingent liability must be considered when the Borrower remains obligated on an outstanding FHA insured, VA guaranteed, or conventional mortgage secured by property that has been sold or traded within the last 12 months without a release of liability, or is to be sold on assumption without a release of liability being obtained. When a mortgage is assumed, contingent liabilities need not be considered if the originating creditor of the mortgage being underwritten obtains, from the servicer of the assumed loan, a payment history showing that the mortgage has been current during the previous 12 months, or the value of the property, as established by an appraisal or the sales price on the HUD 1 Settlement Statement from the sale of the property, results in a loan to value (LTV) ratio of 75 percent or less. Business Debt in Borrower s Name: When a self-employed borrower claims that a monthly obligation that appears on his or her personal credit report is being paid by the borrower s business, it requires the obligation was actually paid out of company funds and that this was considered in its cash flow analysis of the borrower s business. The account payment does not need to be considered as part of the borrower s individual recurring monthly debt obligations if the account in question does not have a history of delinquency, the business provides acceptable evidence that the obligation was paid out of company funds (such as 12 months of canceled company checks), and the cash flow analysis of the business took payment of the obligation into consideration (cannot be also counted as income, and exclude the obligation).

13 SECTION: 1 PAGE: 13 of 22 The account payment does need to be considered as part of the borrower s individual recurring monthly debt obligations if the business does not provide sufficient evidence that the obligation was paid out of company funds. If the business provides acceptable evidence of its payment of the obligation, but the cash flow analysis of the business does not reflect any business expense related to the obligation (such as an interest expense and taxes and insurance, if applicable equal to or greater than the amount of interest that one would reasonably expect to see given the amount of financing shown on the credit report and the age of the loan). It is reasonable to assume that the obligation has not been accounted for in the cash flow analysis. If the account in question has a history of delinquency it cannot be excluded from the borrowers debt analysis. Court-Ordered Assignment of Debt: When a borrower has outstanding debt that was assigned to another party by court order (such as under a divorce decree or separation agreement) and the creditor does not release the borrower from liability, the borrower has a contingent liability. It is not counted as part of the borrower s recurring monthly debt obligations. If the payment is delinquent it is not evaluated as part of the borrower s credit profile, however, it may require a manual downgrade if it affects the AUS finding. Any payment history prior to the debt assignment by the court will be considered in evaluation of the borrower s credit history. Home Equity Lines of Credit If the subordinate financing is a HELOC secured by the subject property, monthly payments equal to the greater of: The minimum payment required under the HELOC terms considering all draws made on or before closing of the subject transaction; or 1% of the recorded total line amount regardless of whether the HELOC has a zero balance or a balance greater than zero. For existing HELOCs secured by property other than the subject, use the payment amount shown on the credit report, except: If the balance is zero, no monthly payment is required to be counted in the recurring liabilities. If there is a balance but no payment is showing on the credit report or the HELOC is not reflected on the credit report, monthly payments equal to 1% of the total line amount must be used for qualifying purposes. Non-reimbursed Employee Expenses: When a borrower has non-reimbursed business expenses, such as classroom supplies, uniforms, meals, gasoline, automobile insurance, and/or automobile taxes, we require use of a 24-month average of the expenses, using information from the borrower s IRS Form 1040 including all schedules (Schedule A and IRS Form 2106). Automobile depreciation claimed on IRS Form 2106 will be netted out of expenses. When calculating the total debt-to-income ratio, the 24-month average for non-reimbursed expenses will be subtracted from the borrower s stable monthly income, unless such expenses are automobile lease payments or automobile loan payments, in which case they are required to be considered part of the borrower s recurring monthly debt obligations. If there is not a 24-month history of such expenses, the lender should develop an annualized monthly average for the expenses and add this calculated amount to the borrower s monthly debt obligations. Property Settlement Buyout: When a borrower s interest in a property is bought out by another co-owner of the property, as often happens in a divorce settlement, but the lender does not release the borrower from liability under the mortgage, the borrower has a contingent liability. If the lender obtains documentation to confirm the transfer of title to the property, this liability does not have to be considered as part of the borrower s recurring monthly debt obligations. Current Principal Residence Pending Sale: If the borrower's current principal residence is pending sale, but the transaction will not close with title transfer to the new owner prior to the new transaction, and the borrower is purchasing a new principal residence, the current PITIA and the proposed PITIA must be used in qualifying the borrower for the subject transaction.

14 SECTION: 1 PAGE: 14 of 22 Conversion of Current Principal Residence to a Second Home: If the borrower is converting a current principal residence to a second home, both the current and proposed mortgage payments (PITIA) must be used to qualify the borrower for the new transaction. Conversion of Current Principal Residence to an Investment Property: If the borrower is converting a primary residence to an investment property, both the current and proposed PITIA must be used to qualify for the new transaction. Rental income may only be considered if the requirements under the rental income section of this guide are satisfied Employment/Income Maximum back-end DTI for all loans is 42.00%. Non-Occupant, Co-Borrower DTI: o Occupant borrower(s) must by themselves qualify at 42.00% DTI maximum o Maximum DTI must not exceed 42% when considering all occupant and non-occupant co-borrowers Qualifying Interest Rate for all 5/1 ARMs is higher of: (a) fully indexed rate or (b) the note rate +2%. Qualifying Payment Calculation for I/O Loans use the Qualifying Interest Rate and an amortization period of 20 years. Return to Employment, Overlay to Appendix Q Section I(A)4(a) o After returning from an extended absence from employment of six months or more, the borrower must be employed a minimum of 12 months in the current job to use the income for qualifying. o Note: A state or federally protected leave is not considered to be an extended absence from employment. Duration of Self-Employment, Overlay to Appendix Q Section I(D)3(b) o Self-employment income must be documented with tax returns reflecting two full years of the current business activity in order for the income to be used for qualifying. o Net losses from self-employment must be deducted from qualifying income regardless of the longevity of the business activity, unless the business producing the losses is documented to be discontinued. MCCs: Mortgage Credit Certificates (MCCs) are not allowed for income qualifying purposes 2.01 Residual Income Requirement for Non QM (I/O) and Rebuttable Presumption QM Loans: A Residual Income Certification form or equivalent is required for loans with the following characteristics: Rebuttable Presumption QM Loans, which include higher priced (APR > APOR + 1.5%) loans that are secured by a Primary residence, Second home, or Investment property that the borrower intends to occupy for more than 14 days per year Interest Only (I/O) Loans that are secured by a Primary residence, Second home, or Investment property that the borrower intends to occupy for more than 14 days per year A residual income certification is not required on any loan secured by an Investment property that borrower does not intend to occupy for more than 14 days per year A residual income certification is not required on any loan that is a Safe Harbor QM loan Where certification is required, the Residual Income must meet VA residual income guidelines PLUS an additional $1200 per month. The Borrower s Attestation form is required.

15 SECTION: 1 PAGE: 15 of Assets If a VOD is provided for asset verification, 2-month's bank statement, at minimum, is also required. All unusual large deposits must be explained and the source must be documented. The borrower s receipt of the funds realized from sale or liquidation when non liquid assets are used for any part of the down payment or required cash to close must be verified. All funds used to close the transaction must be disclosed on the application. Funds coming from a source other than what is verified and disclosed are required to be documented. A copy of all funds used to close the transaction must be in the file at the time of closing/wire. Funds must be from a verified acceptable source in accordance with Fannie Mae guidelines Reserves Units Occupancy Loan Amount 1 Unit 2 Units Primary Residence Second Home or Investment Property Primary Residence RESERVE REQUIREMENT CALCULATION TABLE Step 1 Calculate Subject Property Reserves Number of Months Subject Property PITI Reserves Required (Based on Qualifying Payment) 5/1 ARM 5/1 ARM I/O <$1, 000,000 6 (12 if FTHB) 12 $1,000,001 - $1,500,000 9 (12 if LTV>80% or FTHB) 15 $1,500,001 - $2,000, $2,000,000 to limit <$1,000, $1,000,001 - $1,500, $1,500,001 - $2,000, $2,000,000 to limit <$1,000, $1,000,001 - $1,500, $1,500,001 - $2,000, $2,000,000 to limit Step 2 Calculate Additional Reserves for Departure Residence Scenario 1. Is the borrower converting their current residence to a second home or investment property, or 2. Is the borrower s current residence pending sale and will not close prior to our concurrently with subject transaction? 3. If yes to 1 or 2 reserve requirement = 6 months PITIA, using the greater of: (a) the PITIA of the current residence, and (b) the PITIA of the new/subject property. Step 3 Calculate Additional Reserves for Multiple Financed Properties Owned 1. Does the borrower had additional financed, 1-4 unit, residential, second home and/or investment properties? 2. If yes, reserved requirement = 2 months of the PITIA of each additional financed property owned (Reminder: Maximum 5 financed 1-4 unit properties owned including subject transaction) Step 4 Calculate Total Reserves Required Add the reserve requirement calculations from Step 1 Subject Property, Step 2 Departure Residence Scenario, and Step 3 Multiple Properties Owned, to determine total reserves required.

16 SECTION: 1 PAGE: 16 of 22 Reserve Requirements: Requirements vary based on subject property type, occupancy, loan amount, loan product, other financed properties owned and departure residence status. Source of Funds Requirements: (Follow the requirements in Fannie Mae Selling Guide B3-4, Asset Assessment) o Primary Residence and Second Homes: Occupying borrower(s) must have sufficient assets documented to provide from their own funds. o Investment Properties: Borrower(s) must have sufficient assets documented to provide from their own funds Acceptable Assets Acceptable source of funds for the down payment and closing costs cannot be from any type of secured borrowed lending including, but not limited to: equity in other real estate, borrowed funds from financial assets or other type of collateral such as stock or margin accounts. The minimum reserve requirements are reflected in the grid Section 3.01 Reserves. For reserve calculation, the minimum documentation to correctly verify the full PITIA payment should be from one of the following sources: current monthly mortgage statement, copies of homeowners insurance policy; copy of recent tax bill or web search to taxing authority; copy of mortgage note, etc. The types of assets that can be used for reserves and the value of those funds are as follows, all of which must be verified with documentation: Checking/Savings/Money Market accounts 100% Publicly traded stocks, bonds and mutual funds 65% of value may be used o Non vested or restricted stock accounts are not eligible for use as down payment or reserve Individual Retirement Accounts (IRAs), SEP or Keogh accounts 65% of vested value may be used. (100% of the account value may be used for borrowers aged 59½). Annuities 65% of the vested amount may be used. (100% of the account value may be used for borrowers aged over 59 ½). 401(K) plans 65% of the vested amount, after reduction of any outstanding loans. The terms and conditions under which funds may be withdrawn or borrowed must be verified. Trust Assets borrower/co borrower must have full access to consider; Copy of complete trust or trustee letter is required Business funds may be used for down payment and/or closing costs, not for purposes of calculating reserves. Cash flow analysis required using 3 months business bank statements to determine no negative impact to business based on withdrawal of funds. (i)borrower must have access to funds and (ii) the borrower must be the sole proprietor or 100% owner of the business (or all borrowers combined own 100%). (iii) CPA letter must be included in the file confirming that the withdrawal will not harm the financial strength of the business. Employer Assistance Funds from an established employer relocation program may be used for down payment and closing costs on primary residence purchase transactions. The funds must be a gift or grant and cannot be in the form of a second lien or unsecured loan. The following documentation must be obtained: o Verification that the program is an established company program, not just an accommodation developed for an individual employee; o Verification of the dollar amount and proof that there are no repayment terms or liens associated with the gift or grant; o Terms of any other employee assistance being offered to the borrower; o The requirements listed under Gift Funds below must be met, with the exception that the funds are not required to come from a family member or domestic partner.

17 SECTION: 1 PAGE: 17 of 22 Sale of Assets 100% of the net proceeds from the sale of a residence or other personal assets. Cash Value of Life Insurance 100% of the cash value. Gift Funds refer to Section Gift Funds. Note: Unless specifically stated otherwise, assets must be documented in accordance with Fannie Mae guidelines. Asset types which are not specifically mentioned above are not permitted Assets Minimum Borrower Contribution and Gifts Down payment, funds to close, and reserves must be documented in accordance with Fannie Mae Selling Guide Section B3-4. Minimum Borrower Contribution: In addition to required reserves, borrower(s) must have sufficient assets documented following the requirements of Fannie Mae Selling Guide B3-4 Asset Assessment, to contribute from their own funds a down payment and closing costs equal to: 5% of the sales price for primary residences from the occupying borrower(s), 10% of the sales price for second homes from the occupying borrower(s), 15% of the sales price for investment properties from the borrower(s) on the transaction. Properly documented gifts from a Family Member (using Fannie Mae definition) are permitted only if minimum borrower contribution requirements above are met. Gifts may not be used to meet reserve requirements. Gifts of equity are not allowed Acceptable Donors: A gift can be only be provided by a relative or domestic partner (domestic partner donors must live with borrower). The donor may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any other interested party to the transaction even if they qualify as a blood relative. Refer to Fannie Mae Selling Guide B# for acceptable donors. Documentation Requirements: Gifts must be evidenced by a letter signed by the donor, called a gift letter. The gift letter must: specify the dollar amount of the gift; specify the date the funds were transferred; specify the source of funds; include the donor s statement that no repayment is expected; and indicate the donor s name, address, telephone number, and relationship to the borrower. Verifying Donor Availability of Funds and Transfer of Gift Funds: Sufficient funds must be verified to cover the gift either in the donor s account or transferred to the borrower s account, prior to closing. Acceptable documentation includes the following: a copy of the donor s check and the borrower s deposit slip, a copy of the donor s withdrawal slip and the borrower s deposit slip, a copy of the donor s check to the closing agent, or a settlement statement showing receipt of the donor s check. When the funds are not transferred prior to settlement, the lender must document that the donor gave the closing agent the gift funds in the form of a certified check, a cashier s check, other official check or wire transfer Gift of Equity: Gifts of equity are not allowed Use of Business Funds Business assets may be used if the borrower is 100% owner of the business and a letter from the business accountant is obtained to confirm that the withdrawal will not negatively impact the business.

18 SECTION: 1 PAGE: 18 of Interested Party Contributions Loans with undisclosed interested party contributions are not acceptable. Once the borrower has met the minimum borrower contribution, then maximum interested party contributions (to be used for Fannie Mae permissible purposes only) are: o Owner occupied primary residences maximum 3% for CLTV 75%, 6% for CLTV < 75%, o Second home and investment properties - maximum 3% o Excess amounts are considered concessions that must be subtracted from the sales price when determining LTV/CLTV 4.00 Property/Appraisal Appraisal must be completed in the name of Land Home Financial Services. Required Appraisal Forms: Form 1004 for SFRs and PUDs, Form 1073 for condos Form 1025, Small Residential Appraisal Income Report for 2 unit properties Units must be a minimum 650 square feet Market Condition Addendum is required on all appraisals Properties with ratings of C5, C6 or Q6 are not allowed unless the issues that caused the ratings are cured prior to loan delivery and acceptable documentation is provided by the appraiser. No escrow holdbacks are permitted Age of Appraisal: Appraisal must be dated 90 days from the Note date (both existing properties and new construction) and 120 days from funding date. After a 120 day period, a new appraisal is required (re certification of value is not acceptable). Properties Owned < 12 Months: LTV/CLTV/HCLTV is based on the lesser of the appraised value or acquisition cost, regardless of any property improvements that may have been made. (Property acquisition date may be measured from the HUD 1 closing date, mortgage rating or other acceptable documentation in the loan file). Declining markets LTV Restriction: If appraisal indicates declining market, then maximum allowable LTV/CLTV/HCLTV is reduced by 5% Second Appraisal Requirement for ALL Loan Amounts > $1,500,000: A second appraisal from a different appraiser not affiliated with the original appraiser or the appraisal company (ordered through same AMC is acceptable) is required for loan amounts over $1,500,000. Appraised value for underwriting purposes is the lower of the two appraisals. Review Appraisal, requirements for loan amounts $1,500,000: Either a Collateral Desktop Analysis (CDA) (without MLS data) or a Second Appraisal (meeting above requirements) is needed if: (i) LTV or CLTV or HCLTV > 75% for purchase or R/T refinance, or (ii) LTV or CLTV or HCLTV > 65% for cash-out refinance, or (iii) Subject transaction is a flip or resale of the property where purchase contract date < 180 days after the prior sale date, and subject sales price is more than 10% over the previous sales price. ALSO, THE APPRAISAL(s) MUST SPECIFICALLY ADDRESS THE PRIOR SALE AND JUSTIFY THE PRICE INCREASE. (iv) For Interest Only loans, the TILA HPML Appraisal Rule may require a second appraisal if the subject property previously sold for a lower price within the past 180 days (property flip).